Why we don’t like to lose

Would you prefer to have the chance to gain $100 at the risk of losing $100, or would you rather to just avoid the risk entirely? There has been documented tests of this conducted, which concluded that most people would not risk the lost, even when the odds were in their favour.

Tests done on a group of participants, making use of real money, asks participants to decide whether they would or wouldn’t take a bet. The scientist monitored their brain wave activities whilst altering the amount of money they’d gain/lose.

They found that an increase in possible gain resulted in an increased positive feedback from the participants brain while increasing the potential loss caused a much greater negative feedback in their brainwave activity. These results suggest that people would feel a lost much stronger than a gain, and is believed to be felt about 2 times more.

 

5 roubles coins

Photo: 5 Roubles Coin by Waltie  [flickr]

 

When is risking a loss worth it?

This is referred to as loss aversion; that is that you would much rather keep what you already have than risk losing something, for a chance to gain something of equal value. Consider yourself in an expensive game of heads or tail, if you guess right you gain $100, otherwise you lose $100. There is a 50:50 chance for either event to occur and the expected outcome is $0, which is the expected net gain over a large number of bets. So in this case it would be expected that on average you would neither gain nor lose money.

Thoughts such as, “should I try a new place for lunch?” or “should I buy this game?” occurs throughout everyday life. These are all thoughts that goes through people’s minds in order to decide whether or not to spend the expense to try something new.

In these everyday situations the allure of finding a new gem would probably overpower the inconveniences that it could cause. Hence we are more likely to find ourself, trying new food, games or other activities.

But what about in more extreme situations where the amount of money involved is much larger? Consider a large investment in the tens of thousands where you could potentially gain $10 000 dollars or lose $10 000 dollars. Would you take the risk?

 

brain_teenmentalhealthblog111

Image by: Carlos GQ [flickr]

 

Loss Aversion in politics and commerce

This idea of deciding which one would be better to risk an inconvenience and get a gain is typically used in making political or financial decisions. As an example My Health record which allows you to control who can see and access your health records, under the default setting people in the government and emergency services will have access to your health records under certain conditions. Framing the situation as “would you rather, we cant access it when it is required?” makes use of loss aversion theory as a persuasive tool to keep as many people from opting out. Exploiting human behaviour which would prefer to avoid losses than a potential gain.

 

Image by stocksnaps [Pixabay]

 

Similar approaches are used in commerce, for example by giving people free trials. The act of being in possession of the item through the free trial, they are more inclined to keep and not lose the item, paying for the item as a result. This means that there will be an increase in the number of sales that the product gets.

returning to the initial point, that is the 50:50 gamble most people would find that although you have the chance to gain an equal amount as you stand to lose, most likely people would choose to avoid this bet and just keep what money they have than risk losing the money. As the pain associated with losing $100 is much greater than the joy associated with gaining $100.

All in all though in a lot of cases this kind of effect would not be seen in smaller events where a different effect might be in play. But in larger more important decisions this would be more clearly observable.


11 Responses to “Why we don’t like to lose”

  1. Owen Stanley says:

    Hi Lixing, yea its really interesting how something so obscure could be quantified and explain things like the lottery.

  2. Owen Stanley says:

    Hi Stephen glad you enjoyed the post.

  3. Lixing XU says:

    The feeling even can be visualised and quantified, interesting! This reminds me of lottery. The feeling of gain may be thousands greater than that of lost, that’s why some people would like to take risks to lose small amount of money in a large probability continually.

  4. Owen Stanley says:

    Hi Grahham i also enjoy games that has a penalty when you die, i think that they are great in helping us plan whether to go for efficiency or risk it to go for speed.

    I wouldnt be suprised if it followed the same principles as with money or investments. As i feel that they are also great in teaching “investment” techniques.

    Would you happen to have a link to the article? I would love to have a read

  5. Stephen Yao says:

    Thanks Owen! It’s really an interesting post!
    I love the images you used in the blog, it’s really engaging, and after reading it, now I totally understand why I always tell myself the last bet especially when I lose some money.

  6. grahamm2 says:

    I liked where you went with this topic and how you backed it up with solid explanations. Interestingly, I read an article a little while back that detailed how, online video games where you need to spend lots of time playing but it is possible to lose significant progress if you ‘die’, are growing in popularity. Do you have any thoughts about this?

  7. Owen Stanley says:

    Hi Will, glad you enjoyed the post.

    I think that basic education in probability and statistics, has allowed for people to understand that the risk is “worse” in these one of situations, compared to if they were to be repeated a number of times. Though i feel that it is less of a logical decision than an instinctual one to avoid taking a risk.

  8. Will Long says:

    Nice post Owen!

    I found it very interesting to examine the psychological aspect in risk-taking behaviour.

    What role do you think basic education in probability and statistics would have on loss aversion?

  9. Owen Stanley says:

    Hi Andrew, i’m not sure about texts but i found this article to go more in depth into the topic, and is very interesting to read. https://www.psychologytoday.com/au/blog/science-choice/201803/what-is-loss-aversion

  10. Owen Stanley says:

    Hi Andrew, i’m not sure about texts but i found this article to go more in depth into the topic, and is very interesting to read. https://www.psychologytoday.com/au/blog/science-choice/201803/what-is-loss-aversion

  11. Andrew says:

    Very well written and informative post, also nice usage of imagery.
    If i wanted to read more about this topic are there any texts you would recommend?